New Daytrading Rules Take Effect
by Jeff Miller
August 30, 2001
For the little guy, daytrading is now a bit tougher. On August 27, the New York Stock Exchange, and on Sept. 28, the National Association of Securities Dealers will raise the minimum account balance at member firms for daytraders who trade on margin. The new rules require at least $25,000, up from the current $2,000. The goal with the new rule is to prevent trade-happy investors from losing their shirts, but let's face it - the rule discriminates against the small investor in the hopes that he won't lose his shirt.
More specifically, the new rule defines "traders" as those who execute at least four daytrades a week, but excludes trades that are 6% or less of all transactions. In addition, funds that are used to meet margin requirements have to stay in accounts for a minimum of two days.
Beyond the aforementioned, the new rule limits the amount of daytrading that can take place in a margin account on any day at four times the accounts' equity, which is double the current maximum. Another annoying rule states that daytraders would have to subtract a "special" maintenance margin equal to 25% of the cost of the session's daytrades.
If the daytrader's account falls below $25,000, there will be a five-day period where he'll have to fix it before being forced to trade on a cash basis until the requirement is met. I imagine that with all the latest litigation coming from small investors, it has motivated the industry to raise the minimum, not so much to protect the small investor, but to protect the brokerages. The highly volatile nature of stocks that are rigorously traded can quickly cause a deficit in a smaller account if something goes wrong. How busy do you think the collections departments of brokers have been in the last few years trying to collect on debts of smalltime, cavalier daytraders?
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